The New Republic
Does Microsoft understand America?
The Gates of Power
By Robert J. Samuelson
Issue Date: 04.23.01
Post Date: 04.17.01
World War 3.0: Microsoft and Its Enemies
by Ken Auletta
(Random House, 436 pp., $27.95)
Pride Before the Fall: The Trials of Bill Gates and the End of the
Microsoft Era
by John Heilemann
(HarperCollins, 246 pp., $25)
Trust on Trial: How the Microsoft Case Is Reframing the Rules of
Competition
by Richard B. McKenzie
(Perseus, 281 pp., $26)
I.
As allegory, few companies today rival Microsoft. But as allegory
for
what? Since the late 1980s, Microsoft and its co-founder Bill Gates
have come to symbolize, to admirers and to detractors, the best and
the worst of American business. For its admirers, it represents a
zest
for new technology and a beneficial marriage of self-enrichment and
social improvement. For its detractors, it embodies ambition that
has
evolved into ruthlessness, and an almost pathological pursuit of
economic and technological power. These conflicting versions of
Microsoft crystallized in the antitrust suit brought by the Justice
Department and twenty states in May 1998.
This may well be the most important antitrust suit since the
government's breakup of Standard Oil in 1911. If U.S. District Judge
Thomas Penfield Jackson is upheld on appeal, the division of
Microsoft
into two companies would re-shape competition in the computer
industry, though just how is unclear. The ruling would also warn
other
companies that the acquisition of market power (hardly anyone denies
that Microsoft has market power) imposes obligations of
self-restraint. Otherwise they may be sued by the government, egged
on
by rival companies. But again, the consequences of this murky
self-restraint remain unclear. In the broadest sense, the Microsoft
case poses the question of whether government can constructively
police competition in new technologies.
By and large, Americans favor competition. We regard it as a check
on
excessive economic, social, and political power. We believe that
economic competition advances social well-being by promoting
efficiency and encouraging innovation. The antitrust laws, first
enacted with the Sherman Anti-Trust Act in 1890, reflect these
values.
These laws prohibit the worst abuses of monopoly and market power.
Companies cannot collude to fix prices or to restrict supply.
Mergers
that would let the surviving company control an industry are
generally
rejected. Approved mergers that increase market power often come
with
conditions--the sale of certain properties or businesses--intended
to
dilute that power.
All these restrictions aim to enhance Adam Smith's classic ideal of
competition. His "perfect competition" presumes thoroughly informed
consumers, so that buyers will choose the lowest-priced and
best-performing products. Similarly, perfect competition requires
many
producers, so that none has sufficient market power to limit supply
and to raise prices. (Wheat farmers are the customary textbook
example.) In theory, perfect competition maximizes consumer welfare.
The lowest possible prices prevail. Efficient companies (which can
sell at these prices and still earn a profit) drive out less
efficient
rivals. Although the economy creates few perfect markets, such
markets
are regarded as an ideal worth pursuing. The antitrust laws arose
when
the emergence of immense industrial enterprises (in steel, sugar,
and
oil, among others) offended popular sensibilities and seemed to
insulate these organizations from market discipline.
But there is another model of competition, and it paints a much
different picture of economic and social progress. It comes from
Joseph Schumpeter, who coined the evocative phrase "creative
destruction." Schumpeter's notion of competition pits technologies,
production processes, and business methods against each other. The
superior displaces the inferior. Steel replaces wood; cars replace
buggies; limited liability corporations replace partnerships. It is
this process, rather than intense competition among producers of
similar products, that creates true progress. Innovations of this
sort, Schumpeter thought, might spawn gigantic companies that
dominate
their industries.
Sheer size, however, does not guarantee perpetual success. By its
nature, creative destruction is unpredictable. Yesterday's victor
can
become tomorrow's victim. A company's physical investments, learned
habits, and institutional complacency may blind it to new
technologies
or business methods. There are many famous examples. Xerox offered
its
copier technology to many large companies, but none was interested.
The idea behind Federal Express--an overnight package service at
premium prices--was dismissed as silly. Wedded to what is familiar,
onceinvincible firms may wither. The antitrust laws originally aimed
to preserve competition as idealized by Adam Smith. Can they now
preserve and promote Schumpeter's competition? The Microsoft case
suggests that they cannot.
II.
The trial demonstrated one thing beyond all doubt: that you would
not
want to compete against Microsoft. Every business aspires to what
Microsoft attained in the 1990s, a virtual monopoly over a product
for
which demand was exploding. From 1990 to 2000, worldwide
personal-computer shipments rose from twenty-two million annually to
roughly ninety million. Microsoft's Windows operating system is
installed on about ninety percent of these machines.
(Operating-system
software gives the computer instructions so that it can read other
programs--application software--that perform specific tasks, such as
word processing.) Even better for Microsoft, the extra cost (or the
"marginal" cost) of installing another copy of Windows on another
personal computer is almost zero. The major costs are writing,
testing, and marketing the program. Once these costs are covered,
additional sales are almost pure profit.
With these marginal costs so low, and with demand so high,
Microsoft's
growth and profit margins have been spectacular. Founded in 1975,
the
company "went public" by selling its shares to general investors in
1986. In 1985, sales totaled $140 million and profits $24 million.
In
2000, Microsoft had sales of almost $23 billion and profits of $9.4
billion. The profits came after $3.8 billion was devoted to research
and development spending, which is money essentially targeted
against
actual and potential competitors. Since Microsoft pays no dividends,
it has huge cash reserves that are invested in short-term government
and corporate securities. In mid-2000, these reserves were about $24
billion.
Besides being fabulously well-financed, Microsoft is ferociously
combative. It is one thing to challenge a large, wealthy firm that
is
complacent--say, General Motors twenty-five years ago. It is quite
another to challenge a large, wealthy firm obsessed with
obliterating
any threat--say, Microsoft. The company's character reflects Bill
Gates's personality. He is a genuine geek who was hooked on software
as a teenager in Seattle in the early 1970s. But what always
distinguished Gates from the other geeks was his taste for business.
Geek culture long romanticized free software as an entitlement to
promote computer use; but not Gates. In 1976, he wrote an "Open
Letter
to Hobbyists" in a computer newsletter that (according to John
Heilemann) "asserted for the first time that software, like
hardware,
was a valuable commodity--it was intellectual property, and as such
its creators deserved to be compensated."
Heilemann covered the Microsoft trial for Wired magazine, and Ken
Auletta covered it for The New Yorker. Their books about the trial
agree that Gates's compulsive competitiveness pervades Microsoft.
Gates simply does not like to lose. Usually even-tempered, he is
sometimes given to legendary outbursts. "Why are you trying to screw
me?" he once yelled at cable-television magnate John Malone when
they
had a business dispute. Another time he vowed to "destroy" Sun
Microsystems, a rival. Auletta describes Microsoft as a "tough,
competitive, passionate place." At the trial, one executive
characterized the company's culture as taking "extreme positions to
push ourselves." As much as anything else, Microsoft's corporate
culture was on trial, and it was convicted.
[INLINE]
he language of the Sherman Anti-Trust Act is so broad that if
interpreted literally, it would prohibit most agreements among
companies. Section 1 declares "every contract, combination in the
form
of trust or otherwise" that is "in restraint of trade" to be
illegal.
Section 2 makes it a felony for anyone to "monopolize, or attempt to
monopolize ...any part" of trade or commerce. Since many companies
try
(secretly or not) to monopolize something, thousands of executives
could easily violate Section 2. Over the years, courts have narrowed
the law's sweep. Contrary to the language, companies can attain a
monopoly (at least in theory) as long as they do it legally. If
everyone buys your mousetrap because it is cheaper and better than
anyone else's mousetrap, good for you. What is illegal is to use the
power of monopoly to maintain your dominant position by destroying
competitors. This was Microsoft's sin, the government alleged.
As Auletta and Heilemann show, the trial seemed to prove Microsoft's
guilt. Above all, its executives--led by Gates--acted as if they
were
guilty. They were evasive, defensive, and sometimes obnoxious. Their
statements were often contradicted by the evidence of their own
e-mail
messages. Gates turned out to be the government's best witness. In a
videotape of his deposition that was shown repeatedly at the trial,
he
denied knowledge of matters discussed in his e-mails. He jousted
repeatedly with David Boies, the government's lead trial attorney.
Here is one revealing exchange (quoted by Auletta), after Gates is
asked whether he is "concerned" about a new competitor.
Gates: I don't know what you mean, "concerned"?
Boies: What is it about the word concerned you don't understand?
Gates: I'm not sure what you mean by it....
Boies: Is the term concerned a term you're familiar with in the
English language?
Gates: Yes.
Boies: Does it have a meaning you're familiar with?
Gates: Yes.
Boies: Using the term concerned consistent with the normal
meaning....
Gates and other Microsoft executives seemed to deny the obvious:
that
they pulled out all the stops to beat competitors. The centerpiece
of
the government's case was Microsoft's effort to overtake Netscape's
Internet browser. A browser is a software program that serves as a
translator. It takes the data on a website and converts it into text
and images. Before browsers, the Internet--which is simply a
high-speed data communications network--served mainly as an exchange
of research files and papers for scientists, academics, and computer
buffs. Without browsers, the Internet would not be a mass medium.
Microsoft was slow to recognize the Internet's significance. By
1995,
Gates realized his error. In a memo to his staff in May titled "The
Internet Tidal Wave," he said that "the Internet is the most
important
single development to come along since the IBM PC was introduced in
1981." Worse for Microsoft, the Internet might erode its domination
of
desktop computers. Application software (for creating documents and
spreadsheets, doing taxes, handling investments, and so on) could be
distributed by the Internet and made compatible with the browser.
Then, as now, these programs were mainly compatible with Windows,
meaning that anyone who wanted to use them had to have Windows. The
threat was that desktop computers might operate easily without
Windows. Bye-bye Microsoft? Well, maybe.
Gates and his company responded with a focused fury. They were
determined not to let Netscape's browser, Navigator, dominate the
Internet the way Windows dominated the desktop. Microsoft had its
own
browser, called Internet Explorer; but within the company there was
much pessimism about its prospects. "I don't understand how IE
[Internet Explorer] is going to win," James Allchin, a senior
executive, e-mailed a colleague in December 1996. "Let's [suppose]
IE
is just as good as Navigator.... Who wins? The one with 80 percent
market share." As it turned out, the pessimism was misplaced. Five
years later, Microsoft's Explorer has roughly 80 percent of the
market. What happened?
There are three ways to distribute a browser to customers: it can be
preinstalled on the computer; it can be distributed by Internet
service providers (ISPs)-- companies like American Online--that
provide connections to the Internet; or it can be installed by the
computer user, who downloads it from the Internet or copies it from
a
cd-rom. Microsoft tried, largely successfully, to deny the first two
channels to Netscape; and by improving Explorer, it made the last
channel virtually irrelevant.
For starters, Microsoft made Explorer free in early 1995 by
including
it as part of Windows. This soon stopped Netscape from charging for
its browser (which had cost between $39 and $49) and cut off the
company's main source of revenue. Microsoft insisted that
manufacturers of personal computers (companies such as Compaq,
Hewlett-Packard, and IBM, called "original equipment manufacturers,"
or OEMs) offer Windows with the pre-installed Explorer. When Compaq,
then the world's largest PC maker, decided to feature Navigator over
Explorer on some computers, Microsoft objected. It maintained that
this would violate the terms of its license for Windows. It then
threatened to withdraw the license, a move that could have put
Compaq
out of business. Compaq backed down.
There were other ways to promote Explorer. In 1996, America Online,
the largest ISP, decided to offer Explorer to its customers. In
return, AOL was included in a preferential "folder" for ISPs on
Windows. In 1997, Microsoft settled a series of disputes with Apple
and agreed to invest $150 million in the financially strapped
company,
and one condition of the settlement was that Apple feature Explorer,
not Navigator, on its computers. Finally, some OEMs got price
discounts on Windows to promote Explorer. For a student of monopoly,
all this looks incriminating. First you give away the product,
forcing
the competitor to do likewise; then you pressure your (dependent)
customers to smother the rival's product; finally, you bribe your
customers to favor your product a bit more.
Judge Jackson adopted the government's "facts" and legal theories
almost in their entirety. Microsoft had alternative explanations for
what happened: AOL was said to have adopted Explorer because it had
better technical features than Navigator. But Jackson was so
offended
by Microsoft's witnesses that he didn't give much weight to these
stories. We know this because Jackson has told us. Although he once
advised judges not to talk to the press, the judge flagrantly
violated
his own dictum. After his rulings, he gave numerous interviews, and
while the trial proceeded he spoke extensively with Auletta on the
condition that nothing could be used until after the trial was over.
"Truth be told," Jackson said, "a lot of Microsoft's witnesses were
not credible."
As tales of the trial, both Auletta's and Heilemann's accounts are
splendid, extensively reported, and well written. I prefer
Heilemann's
account for several reasons. For a start, it is about half the
length
of Auletta's tome; Auletta seems to have dumped everything in his
notebook onto the printed page. And Heilemann shows in convincing
detail--not available in Auletta's account--that the government's
antitrust suit was actively promoted by Netscape. The company's
attorneys assembled evidence and (along with other Microsoft rivals)
aggressively lobbied the Department of Justice to sue. According to
Heilemann, the lobbying was critical in persuading Joel Klein, then
assistant attorney general for antitrust, to file. For better or
worse, legal action now plays an important role in economic
competition.
But finally both these books are disappointing. Sooner or later,
almost all reporters cover a story that they think is so dramatic
and
so significant that its narrative cries out to be told in exhaustive
and enthralling detail. United States of America v. Microsoft
Corporation struck Auletta and Heilemann as just such a story. They
were wrong. It isn't. The human drama is muted: Boies, Gates, Klein,
and Jackson just aren't that interesting. The case is significant,
to
be sure; but its significance lies in the very issues of economic
and
social power that, by hewing so closely to the court proceeding,
neither Auletta nor Heilemann engages directly. In this sense, they
miss the story.
III.
Presumably, the antitrust laws exist to advance some larger public
interest. The trouble with the government's case is that it never
demonstrated that Microsoft harmed this larger public interest. It
never demonstrated, in particular, that the brutal competition made
consumers worse off. Traditional economic theory holds that a
monopolist uses its market power to raise prices and to suppress
innovation. Competitive markets would lower prices and increase
innovation. But this is a hard case to make against Microsoft.
Microsoft sells Windows for pre-installation by computer makers
(Compaq, Dell, IBM, and other OEMs) for about $50 to $60 per copy.
The
retail price of Windows 98 (cited by Jackson) was $89. These levels
are hardly oppressive. On a typical personal computer sold in the
late
1990s, they might represent 2.5 percent to 10 percent of the final
price to the consumer, as the economist Richard McKenzie notes in
Trust on Trial. McKenzie visited a local computer store in November
1999 and found the retail prices of OS-2 (an IBM operating system)
to
be $110 and the price for Apple's Macintosh operating-system
software
to be $85. Suppose that there were four or five major competing PC
operating systems. Would all or any of the prices be much lower than
the price for today's Windows? This seems unlikely.
As for suppressing innovation, Microsoft's power to do so was
limited.
Having belatedly recognized the Internet's significance, and also
its
threat, Microsoft did not try (as it might have) to frustrate the
Internet's expansion. Quite the opposite. By bundling Explorer with
Windows, Microsoft made it easier for computer users (many of whom
were undoubtedly technophobic) to use the Internet. The intense
competition between Netscape's browser and Microsoft's browser
probably hastened public acceptance of the Internet. At the trial,
James Barksdale, Netscape's former chief executive, testified that
Microsoft's capture of the browser market would harm innovation
because there would be no pressure to improve the technology. His
prediction may one day be vindicated, but it has not been yet.
One reason Microsoft won the browser war is that it ultimately
created
a better product. By late 1996, Jackson found, users could not tell
the difference between Explorer and Navigator. By fall 1997,
Explorer's quality was rated equal or superior to Navigator's by
many
technical reviewers. Although Netscape could still distribute its
product over the Internet or as a CD sent through the mail, computer
users had less reason to adopt it. Despite its present market
dominance, Microsoft still issues new versions of Explorer.
Similarly,
Netscape, which is now owned by America Online, continues to improve
Navigator. Comparing the latest versions of both, Walt Mossberg, the
computer columnist for The Wall Street Journal, concluded that
Navigator causes a PC to crash more often than Explorer. "I can't
see
any real reason for satisfied Internet Explorer users to switch to
Netscape 6.0," he wrote, "unless they wish to make an anti-Microsoft
statement."
In his decision, Jackson claimed that consumers had suffered harm
from
Microsoft's power. But this is a mere assertion, with little
supporting evidence. Worse, Jackson did not consider any possible
good
that might flow from Microsoft's domination. Microsoft created an
almost universal standard for PCs. This had huge practical benefits.
It meant that computer users, having learned one system, would not
have to learn another. They could move from job to job without being
re-trained on new computers. They could transfer disks from office
PCs
to home PCs, from desktop PCs to laptop PCs. The standard meant that
application software (for writing, games, tax preparation, inventory
control, and other tasks) could conveniently be written for a single
operating system. This expanded the availability of software.
Perhaps
seventy thousand programs can run on Windows, compared with twelve
thousand for Macintosh, Jackson found.
Economists call this process a "network effect." The larger a
network,
the more useful it is. If only two people have fax machines, they
are
not very useful. If sixty million people have fax machines, they are
quite useful. Ditto for telephones, e-mail, or software. If many
people use a software program, the price can be lower. Microsoft
spawned a vast worldwide network of people using computers with
Windows. This was not pre-ordained. In the late 1980s, Apple's
Macintosh was widely regarded as easier to use than PCs with
Microsoft
software. But Apple's business model was different. It decided to
maximize profits by owning as much of the final product as possible.
It made and sold computers. It wrote the operating software for
Macintosh. It did not license the software to others.
By contrast, Microsoft's approach was (perhaps of necessity)
different. In 1981, IBM selected Microsoft's ms-dos software to run
its first personal computer, which used Intel computer chips. In a
massive blunder, IBM chose to license the software rather than to
buy
it. Microsoft kept ownership and licensed it to any company that
wanted to make PCs based on the IBM-Intel-Microsoft model. The
result
was a new industry of personal-computer makers, led by Compaq, Dell,
and Gateway, among others. Competition was fierce. Companies adopted
new methods of manufacturing, marketing, and distribution. PC prices
declined, especially compared to Apple's. Application software
expanded.
As McKenzie shows in great detail, Microsoft consistently sought to
expand and to enhance the network by keeping prices low and adding
new
software features. It was this business model, not Apple's
restrictive
rival, that accelerated the rise of a mass market for personal
computers. There is a certain irony that Microsoft's model, which
created more opportunities for hardware companies and other software
firms, is now under antitrust assault.
IV.
The paradox, then, is that Microsoft seems to possess and to
exercise
monopoly power, but not to enjoy the presumed benefits of higher
prices and less innovation. How can this be? The most important
reason
is the nature of Microsoft's market.
Almost all products and services experience a period of explosive
growth--from the point when the product is unknown--before reaching
maturity. During the explosive phase, prices usually drop sharply.
Companies discover lower-cost methods of production. Lower costs in
turn expand the market, and higher sales decrease unit costs. At
maturity--at market saturation, when the product has achieved
widespread acceptance--companies must survive on the sluggish growth
of population increases, replacement purchases, or repeat business.
If
your car wears out, you buy a new one. If you like a new restaurant,
you go back.
For personal computers, the 1980s and the 1990s were the period of
explosive growth. The expectation was that, like Henry Ford and the
Model T, profits would come more from volume than from price. Gates
was very much of this mind. Companies (such as Apple) that pinned
their success more on pricing power belatedly discovered that this
strategy was short-sighted and self-defeating. The point is simple.
Even if Microsoft possesses monopoly power, this was the wrong time
to
attain to the archetypal consequence of monopoly: higher prices.
Gates
simply didn't believe that gouging made business sense.
There was also something else that frustrated Microsoft's monopoly
power. Again, companies in mature markets can depend on a steady
replacement demand. Your car will wear out. It will need
maintenance.
At some point, its high maintenance costs will persuade you to trade
it in. If car companies offer flashy new designs, you may buy a new
model before your old one becomes a clunker. Many services also have
steady demand: you constantly need to renew health insurance, or to
go
to the cleaners. But this predictable demand does not apply to
personal computers. They have few moving parts, so they do not wear
out quickly. In this respect, they are more like televisions than
like
cars. And unlike dry cleaning or insurance, many of the services
provided by PCs do not require repeat purchases.
The upshot is that the PC industry--the chip-makers, the software
companies, the OEMs--needs to make customers discard their old PCs
(which are still perfectly good) and buy new ones. The obvious
solution is to make new models that do more things, and that do them
faster and more cheaply. Corporate customers get greater performance
for less price: an inventorycontrol system that works more swiftly,
provides more information, and costs less to operate. Individuals
get
simpler, more reliable, more versatile, and "cooler" machines.
Marketing and innovation blend. The point, again, is simple:
Microsoft--and everyone else in the PC industry--has a big stake in
innovation. Otherwise sales will stagnate.
And high-tech companies hate stagnation. They are obsessed with
growth. Without the prospect of rapid growth, investors will not
envisage huge future sales and profits that rationalize--perhaps
foolishly--high stock-market valuations and price-earnings (or PE)
ratios. Companies need high stock prices and high PE ratios to lure
new employees with stock options, to raise new money by selling more
stock, or to buy other companies with their shares. (A PE ratio is
the
relation between a firm's stock price and its profits, expressed as
earnings per share. Historically, stocks have had a PE ratio of
fourteen; but many high-tech firms have recently had PEs in the
hundreds or even the thousands.) Microsoft shared the obsession with
the stock market. Indeed, Microsoft helped to create it. Thousands
of
its employees have stock options.
[INLINE]
ut if microsoft's markets prevented it from being a textbook
monopolist, the same markets conditioned it to act like a bully. No
book better defines the mentality of today's high-technology
industries than Only the Paranoid Survive, by Andrew Grove, the
chairman of Intel. Published in 1996, Grove's book portrayed
business
success as fragile and constantly threatened. If you don't worry
about
everything, you may soon not have to worry about anything. And you
should worry most about "strategic inflection points": basic
business
changes that might propel your firm to new heights or consign it to
oblivion.
Grove argued that these strategic inflection points occur in most
industries. The advent of Wal-Mart and other superstores obliterated
many local stores, regional chains, and old-line discount stores.
Yet
the upheavals seem more common in industries dominated by
technological change. Personal computers threatened traditional
computer firms. Many foundered, and Digital Equipment Corporation,
once the second largest computermaker, did not survive. Grove's
theme
has now become dogma in the high-tech world. "My job is to delegate
paranoia," Steve Case, the chairman of America Online-Time Warner,
told Auletta. Gates has written that "sometimes I think my most
important job as CEO is to listen for bad news."
More than anyone, Gates personifies management by paranoia. He lives
in a harsh world of threats and opportunities. This helps to explain
both Microsoft's success and the loathing that it inspires. When
Gates
pursues another company's business, he does not go after a little of
it or most of it. He goes after all of it. It's eat or be eaten.
Interestingly, some of Netscape's top officers had the same idea.
They
bragged that they could topple Microsoft. As Auletta and Heilemann
observe, Microsoft could have plausibly argued at trial that its
attacks on Netscape were simply a response in kind: they tried to
kill
us, so we tried to kill them. Instead, Gates and Co. pretended
unconvincingly that they were not especially bothered by the
Netscape
threat. Gates probably saw Netscape's challenge as a potential
strategic inflection point--a struggle that, if lost, might lead to
ruin.
He may have been right. But he may also have misjudged the true
strategic inflection point confronting Microsoft. In the early
1990s,
Microsoft ceased being an ordinary company and became a company that
had to watch its relationship with the government. When companies
attain a certain critical mass of size and power, the government
inevitably becomes a lightning rod for complaints and
discontents--from competitors, customers, and the public. Microsoft
simply joined the likes of General Motors. The complaints may or may
not be justified; but any company concerned with its own well-being
will try to anticipate them and, if possible, to defuse them. And
surely, once they occur, it will take them seriously.
Gates and his associate Steven Ballmer failed to make this
transition.
They had ample warning: in 1994, the government and Microsoft had
reached an antitrust consent decree involving practices that the
Justice Department regarded as anti-competitive. Afterwards Gates
and
Ballmer treated the consent decree contemptuously. They did nothing
to
moderate Microsoft's hyper-competitive behavior. Would it really
have
been crippling to allow Compaq and other computer makers to offer
Navigator as the preferred browser, if some customers wanted
Navigator?
Explaining Microsoft's take-no-prisoners attitude, Auletta and
Heilemann contend that Gates and Ballmer were determined to avoid
the
fate of IBM, which lost its dominance of the computer industry
arguably because the company became bureaucratic and fearful of
antitrust suits. "The minute we start worrying about antitrust, we
become IBM," Gates once remarked, according to Heilemann. There may
have been other reasons. Perhaps Gates and Ballmer were too
parochial:
so immersed in business that they could not see anything else.
Whatever the explanation, the lapse represented a real failure of
corporate management, and it opened up Microsoft to a government
action that more astute executives might have avoided.
Regardless of how the antitrust case concludes--Microsoft might win
reversal of some or all of Jackson's rulings--it has cost Microsoft
dearly. On this, Auletta and Heilemann also agree. There has been a
huge drain on the time and the energy of top executives; some of
them
have left. It has tainted the company's image, probably irreparably,
an image that had been (except among some disgruntled techies and
corporate rivals) immensely favorable. Microsoft was once everyone's
example of America's entrepreneurial genius at work.
The financial costs have also been substantial: one official told
Auletta that the trial expenses could total $100 million. But if
Microsoft ultimately loses, there might be damages (perhaps in the
billions) from private lawsuits. Some see Microsoft as a victim of
the
government's excesses, but it is a victim also of its own.
V.
Today's antitrust laws cannot deal easily with the likes of
Microsoft.
These laws were crafted to enhance Adam Smith's competition, and
they
founder on Joseph Schumpeter's competition. Smith's competition
assumes that the more competitors, the merrier. It assumes that
sellers peddle similar products or services. Schumpeter's
competition
is a struggle between the old and the new. The number of sellers
does
not really matter. Much competition in the computer world is of the
Schumpeterian type, and the intellectual foundation of today's
antitrust laws lacks a coherent basis for distinguishing between
socially desirable behavior and socially destructive behavior. This
is
why the Microsoft case is so confusing. Microsoft seems to have
behaved badly without hurting anyone, except its rivals.
The most damning commentary on the government's case came from its
chief economic witness, Franklin Fisher of the Massachusetts
Institute
of Technology. Asked whether consumers were being victimized by
Microsoft, he said: "On balance, I would think the answer was no, up
to this point." The government wants Microsoft broken into two
competing firms on the basis of hypothetical harm. One company would
own Windows; the other would own all of Microsoft's other activities
(the browsers and application software). Competing against each
other,
the companies would (supposedly) create rival operating systems and
applications. There have been countless other imagined outcomes,
from
two complementary monopolies to a chaos of competing operating
systems.
As sensible policy, the proposed breakup seems a stretch. Yet Fisher
and economist Daniel Rubinfeld (formerly the anti-trust division's
chief economist) argue that this is precisely what the antitrust
laws
allow. "Antitrust law does not require proof of such [consumer]
harm,"
they write in Did Microsoft Harm Consumers?, a recent publication of
the American Enterprise Institute. "The law merely requires harm to
competitors on the general presumption that such harm, in turn,
leads
to harm to consumers." Here is the crux of the issue. Everyone
agrees
that competition is good, but hardly anyone faces the hard question
of
what constitutes competition. The loose language of antitrust laws
gives courts much leeway in defining permissible behavior.
The government's argument against Microsoft, if accepted, could
transform antitrust laws into legal weapons deployed by companies
against their rivals and disconnected from any larger public
interest.
Any company that achieves market dominance might face suits from
disgruntled competitors, alleging antitrust violations. Consumer
harm
would be assumed, even if it could not be found. The antitrust laws
could evolve into an official sanction against striving and success.
Boorish and bullying behavior would be criminalized.
This would be undesirable. The boundless ambition of people such as
Gates helps to perpetuate America's vitality. As often as not, the
creators of great enterprises are driven, single-minded,
unreasonable,
passionate, highly competitive, relentless, self-righteous, and
egocentric. They are not always likable. They see business as a
merciless struggle. "This is rat-eat-rat, dog-eat-dog. I'll kill
'em,
and I'm going to kill 'em before they kill me," Ray Kroc, the
founder
of the McDonald's chain, once said. Gates belongs to this class.
They
may or may not be good neighbors, friends, or parents; but their
obsessiveness fosters new ideas and industries. Their success ought
to
be curbed and penalized only if it becomes abusive to the larger
society.
But what if there is no way of assessing abuse? Microsoft's power,
and
the resentment that it inspires, lies in the network. Most personal
computers use Windows. This creates huge benefits of
standardization,
while also conferring on Microsoft immense economic and
technological
power. Many of Microsoft's customers and competitors naturally
regard
it as a despot, benevolent or otherwise. Everyone that depends on
Windows is vulnerable to Microsoft's next whim. Given the network's
importance, the interesting thing about the Microsoft trial is how
little attention was paid to it.
In some ways, this was understandable. The government could not
focus
on it without inviting a cost-benefit calculation of the network's
value; and this might have gone in Microsoft's favor. But Microsoft
could not raise the network's value in its defense, because its
position as the network leader looks like a "natural monopoly"--and
past natural monopolies (such as the telephone company and the
electric utilities) have been regulated by the government to prevent
abuses of their pricing power. Microsoft did not want to justify
government supervision of its operations. The perverse result was
that
the central questions posed by the Micro-soft antitrust case were
virtually ignored. How can society deal with the network? Should
society deal with the network?
Just because the Justice Department's case against Microsoft is weak
does not mean there is no case. The great fear inspired by Microsoft
is that it will use its huge profits from Windows to extend its
reach--its monopoly--into related markets. It will incorporate more
and more new software into Windows, just as it incorporated the
browser. And it will overwhelm competitors in many software markets.
This has already happened in popular applications (word processors,
spreadsheets). It may now be happening for software for servers--the
computers that manage networks of other computers. A decade ago,
Microsoft's share of this market was negligible; today it is rising
rapidly.
To its critics, Microsoft is the grim reaper. Wherever it ventures,
its rivals ultimately die. This specter is plausible. I have argued
that so far this process has mostly benefited the public. The
conquests involved mostly competitive (or superior) products at
competitive prices. But this may not always be true. Microsoft's
intensely competitive behavior reflects the youth of the personal
computer industry and all its derivatives, including the Internet.
Once the industry matures, things could change. Microsoft might
compensate for slower growth by raising prices. At least in the
short
run, it faces few restraints. And so many computer users, both
companies and individuals, may be locked into Microsoft's technology
that the costs of changing it would be prohibitive. Technology could
become rigid, if not frozen. What will curb Microsoft's power then?
[INLINE]
here are answers, but none of them is entirely satisfactory. Judge
Jackson ruled that Microsoft's market consists of desktop computers
with Intel-like chips. In this market, Microsoft enjoys a
near-monopoly. But what if the true market is much broader: the
delivery and the display of digital information? Then Microsoft's
position is much weaker. In many areas, its ambitions remain
unfulfilled. Its online Internet service (MSN) lags far behind
AOL-Time Warner. Palm Pilot dominates the hand-held computer market,
not devices using Microsoft software. Similarly, Microsoft has
struggled to be a major player in writing software for wireless
devices. Threats from alternate technologies, existing and not yet
existing, may check Microsoft's power and complacency.
Interestingly,
Schumpeter seemed to embrace this view. His sort of competition, he
wrote, acts before it assumes a concrete form and only is "an
ever-present threat. It disciplines before it attacks."
What also restrains Microsoft is its reputation for ruthlessness. As
a
software company, it needs partners, such as hardware companies (the
makers of computers, wireless devices, or other "boxes"). The very
characteristics that make Microsoft an attractive partner--its
wealth,
prominence, market power, and drive--also scare possible partners.
Dependence on Microsoft may seem like a death wish. Auletta relates
a
telling story of Gates meeting with the heads of major
cable-television companies. He was trying to persuade them to adopt
Microsoft's software for set-top boxes that would provide television
access to the Internet and interactive television. Gates wanted a
fee
for each box and fifty percent of any revenues from interactive
transactions or Internet advertising. According to Auletta, the
cable-television chiefs were stunned by Gates's proposal. A fee was
reasonable. A cut of their revenues was not reasonable. He wanted
control of their business. Brian Roberts, the head of Comcast--a
company in which Microsoft had an 11.5 percent ownership
stake--broke
the silence: "Bill, let me be the first to express our reaction: no
fucking way."
Microsoft's rise has been so stunning that it naturally casts itself
as a morality tale: "Small Company Becomes Amazing Success but Is
Undone by Its Own Power and Wealth." Once upon a time, Heilemann
writes, "interviewing Bill Gates was one of the great pleasures in
journalism." He was unlike most corporate CEOs or major politicians,
who are "polite and pleasant to the point of inanity ... and [who]
ooze false sincerity and exude excess optimism." Gates, by contrast,
was candid, engaging, offensive, and profane. But when Heilemann
visited Gates in early 1999, he found someone who is "guarded,
distant
and defensive." He had been ground down by the consequences of his
own
success.
This story no doubt contains much truth. But the larger story is one
of ignorance. As a society, we have yet to reconcile old laws with
new
technologies and new industries. Economists, legal scholars,
business
leaders, and politicians need to develop a consensus, or at least
some
rudimentary understanding, about how, if at all, to police
Schumpeter's competition. Right now there is only a huge black hole
of
knowledge. Sooner or later the Microsoft case will be resolved. It
might be settled by the company and the government; or the courts
may
determine Microsoft's fate. But the unsettling fact is that nobody
can
possibly know the consequences of curbing Microsoft's power or of
leaving it alone. One way or another, we will all be driving in the
dark.
ROBERT J. SAMUELSON writes a column for Newsweek and The Washington
Post Writers Group. He is the author, most recently, of Untruth: Why
the Conventional Wisdom Is (Almost Always) Wrong (Random House).
RELATED LINKS
TNR Online's Books and Arts Newsletter
Free news, links, and special features. E-mailed weekly.
Slamming Gates
Is Microsoft-bashing good for you?.
the new republic Unsweet Smell of Success
Jackson Lears on how Bill Gates makes J.P. Morgan look good.
Software Baron
Richard Wolffe on what's at stake in the Microsoft trial.
Copyright 2001, The New Republic
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